Are Jobless Claims Overstating Labor Pain?

A closely watched measure of unemployment likely overstated labor market pain last year. Even so, the discovery didn’t mean finding a job was any easier in 2010.

New research from the Federal Reserve Bank of San Francisco, released Monday, said that “claims data may have exaggerated layoffs in 2010 because the fraction of unemployed workers applying for benefits was higher than before the recession.” Economists Bart Hobijn and Aysegul Sahin wrote, “If the proportion of eligible workers who applied were held constant, 2010 claims would have averaged roughly 20% less than the actual reading.”

The paper hopes to resolve a mystery of sorts: Namely, how in the face of a recovery in growth a key variable of labor market vitality remained so moribund.

Weekly unemployment insurance claims are notoriously volatile, and many forecasters don’t even make an attempt to predict the number as they do with other indicators. That said, the claims data are about as close to a real-time read on hiring conditions that there is, and economists see the data as important in forecasting the government’s monthly non-farm payrolls report.

The labor market has appeared to be staunchly resistant to the overall improvement in the overall economy. Indeed, as growth has picked up and companies have gotten back on their feet the economy has shown very little in the way of job growth.

The situation remains troubled: The January jobs report released Friday was a dog’s breakfast beset by weather-related and other factors preventing a definitive interpretation. Many forecasters believe companies have been able to use high productivity rates to delay hiring, and predicted it will only be a matter of time before job growth begins in meaningful size.

The paper’s authors acknowledge what they’ve uncovered about claims data doesn’t change the overall view of the economy, writing, “We find little evidence that the labor market was much stronger in 2010 than previously thought.” That said, they think they’ve got a handle on why weekly unemployment insurance claims averaged 468,000 last year, about 70,000 higher than what one would have expected for that stage of the business cycle.

According to the paper’s authors, the key thing to understand is that while it’s no surprise claims rise when layoffs increase, the “take-up rate” increase is also important. “The take-up rate is the percentage of individuals eligible for unemployment insurance who claim and receive UI benefits. Thus, changes in the take-up rate make it harder to compare the level of initial claims over time,” they wrote.

“We find that the take-up rate has increased significantly” and it was 37% higher last year compared to 2007, given changes in eligibility and the length and depth of the recession, the analysts wrote. “The level of initial claims in 2010 reflected not only the level of layoffs, but also the increased reliance of laid-off workers on the [unemployment insurance] system.”

Ultimately, even with the adjustment, the 2010 jobs market was pretty bad. The take-up rate “increases when the average duration of unemployment is high,” the economist wrote, noting “long-duration unemployment, of course, is an indication of poor job-finding prospects.”